Stocks rallied last week when a non-voting member of the Fed stated something totally pointless (that the Fed should consider postponing its taper… when there’s only $5 billion left in QE anyway).
Put another way, the markets were so desperate for a Fed intervention that the idea of $5 billion coming later rather than now makes a difference some how. It’s pathetic, but when 70-80% of market volume comes from non-thinking computer trading programs, the words “Fed” and “President” matter more than common sense.
Deep down, just about everyone knows this whole “bull” market is based on the Fed. Various pundits will prattle on about earnings and the like, but the reality is that earnings are heavily massaged. Heck even 30% of CFOs admitted in a study to knowingly overstating earnings.
Moreover, all that record cash produced by these record profits is dwarfed by the record debt that corporations took on to goose EPS through stock buybacks.
And this reveals the true state of affairs for both the economy and the stock market.
Take a look at how C-level executives have steered their companies since the 2008 Crisis. Most of the increase in profit margins came from lay offs. The extra profits produced by this combine with debt issued to buy back stock…not cap ex or hiring.
The buyback then helps facilitate higher share prices, which said executives then use to cash out their options and dump their personal stakes in their companies at a pace not seen since 2000.
Put another way, those individuals responsible for running the largest companies in the US, who know more about their companies’ growth prospects and the economy have used the Fed’s policies to cash out.
How telling is it that they’d rather have cash than stock? They would rather have this money sitting in a bank account earning next to nothing, or in a bond earning only slightly above nothing, than in stocks.
Of course, some of the money went towards buying luxury art work and luxury real estate which helps explain the strength in those markets… but you get my point… the captains of industry don’t want to be in their own stocks.
And remember, these are also the folks at the front-lines of the economy. They know the data from their own firms before anyone else in the public does… including the Fed or BLS.
And they’re dumping stocks.
The whole mess will come crashing down, just as every other funny money fueled bubble does. The fact that we’ve got the following says it all:
1) Corporate debt is back to 2007 PEAK levels.
2) Stock buybacks are back to 2007 PEAK levels.
3) Investor bullishness is back to 2007 PEAK levels.
4) Margin debt (money borrowed to buy stocks) is at 2007 PEAK levels.
5) Investor complacency is at a record LOW.
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Phoenix Capital Research